All right. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Good afternoon, everyone. Thanks for sticking with us here at the Morgan Stanley Financials Conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research. It's my pleasure to welcome Paul Shoukry, President, CFO of Raymond James, and soon to be CEO, sometime in fiscal 2025, I believe.
Yes. Great to be here.
Thanks for having us, for being here. So Raymond James is a diversified financial services company providing wealth management, asset management, capital markets, and investment banking services. The company has over 8,700 financial advisors, oversees $1.4 trillion of client assets. So thanks for joining us here, Paul. So let's dig in, starting with recruiting. It was mentioned at Investor Day that the pipeline is quite strong. So I was hoping maybe you could just elaborate a bit on the recruiting pipeline, what you're seeing just in terms of activity, recruiting across your three affiliation channels, and how that's evolving.
Great. First, just want to thank you again and Morgan Stanley for hosting this conference. Seems like great attendance and a beautiful day in New York to boot. So happy to be here. As far as recruiting goes, really our Best of Both Worlds value proposition continues to resonate with high-quality advisors across the industry. What I mean by Best of Both Worlds is that we have a platform that's big enough with the scale, scope of resources, products, and technology that attracts the largest advisors from the largest firms in the industry because they've become accustomed to the scale and scope of services that the big firms offer. We also offer a culture that is advisor-focused that acknowledges the relationship that the advisor has with their client, not with our client, but we acknowledge the book ownership across all of our affiliation options.
And so that culture for a firm with the scale and scope of services and the platform that we have is very unique. And to offer that unique differentiation across all of our affiliation options gives us the largest addressable market in our space. And so we are resonating across all of our affiliation options. When you look at our recruiting pipelines, they're very robust. And again, it's because of that unique value proposition that we offer advisors.
Any particular color that you might be able to provide as you kind of look across the three channels, the independent contractors, the employee side of things, and then the RIA, just as you kind of look at them? Any particular one that's stronger than the other? Just anything on the cadence?
Nothing thematic. I mean, it always seems like one of the channels is recruiting at a more rapid pace than another in any particular year. This year, for example, the employee channel is seeing very strong momentum, but last year is just the opposite. So I don't know if there's anything thematic to point to there. But I think what I could point to across all of the affiliation options is that the size of the teams that we're attracting continues to get larger. So as we've added and invested in the platform, whether it's alternative investment products, our Private Wealth initiative that we've launched for high-net-worth focused advisors, things that we're doing in coordination with investment banking, with alternative products areas, have really drawn a lot of interest from those advisors that focus on the high net worth and ultra high net worth.
Therefore, we're seeing larger and larger teams interested in joining and affiliating with Raymond James.
So larger team sizes, large pipelines. Would you characterize them as being larger than a year ago if you look at each of the channels or a more similar size?
Yeah, it's hard to compare year to year, but certainly larger than five years ago and much larger than 10 years ago. So over time, we're trending and attracting larger advisors.
Great. It was mentioned at Investor Day that there are some practice repositioning that's occurring that could weigh on organic growth a little bit in the near term. Maybe you could just elaborate on the practice repositionings, what exactly that means, how many advisors or assets could be impacted here, and what the timeframe might be around that. Are there any offsets?
Yeah. Yeah, so I think a lot of the large firms that have consolidated over time that are on our platform, most of them are on the independent side of the business. Frankly, with private equity money getting into our space in a very aggressive way, some of those firms are turning to private equity for liquidity events or for additional capital. And so they range in sizes, but they're usually larger firms. And we have an RIA platform, so to the extent that they want to transition to RIAs and they're good fits, then that's something that we have certainly accommodated successfully with some of those firms. But in some cases, they're not good fits even on any of our affiliation options. And in other cases, they're just getting money to, frankly, go to a different situation or structure.
So I would say the one silver lining with those type of firms is that over the years, as they've gotten so large, they've negotiated economics that are less favorable to us on average. And so some of those firms, even when they leave our platform, when you compare their average margin or profitability, it's not as big of an impact as the dollar of asset or the number of advisors would suggest.
Oh, interesting. So it may not have as much impact on the bottom line as may otherwise be the case.
Right. It's not necessarily proportional or commensurate in that regard.
Okay. And you've generated about 7.5% organic growth or so over the last 10 quarters. How should we think about the building blocks underpinning that? As we look forward, what level of organic growth do you view as sustainable over the long term?
Yeah, we've been a consistent best-in-class organic grower in our industry for years and years now. And certainly since we've produced the net new asset metric, we're among the top, if not the top, in any given quarter in terms of organic growth. And that's largely due to the strong retention, first and foremost, and also the strong recruiting results that I mentioned earlier. And we feel very good about, as we look forward, the pipelines for recruiting across the affiliation options. So we think that that's sustainable going forward. There's still a lot of headroom to continue adding high-quality advisors from other firms in the industry. And then long term, we're confident around our retention as well. Short term, there'll be some blips with some of those large platforms that we just talked about, especially with the private equity money being extremely aggressive in our industry.
But we're actually confident that the private equity trend five years from now will only reinforce the value proposition that we offer at Raymond James. And that value proposition at Raymond James is to be a long-term stable platform for advisors and their clients, for advisors who do not want to have disruption again in three to five years or make another major change for their clients and force their clients to make another major change in another three to five years. And that long-term value proposition is the exact opposite of the value proposition that the private equity firms are offering. They're offering their investors the highest return possible in the shortest amount of time possible. And that, by definition, may require yet another catalyst for a disruptive event for advisors and their clients three to five years down the road.
And so while the private equity trend is certainly disruptive near-term in the wealth industry, I think if we look at it, if we're sitting here five years from now, I truly believe we'll look back and say, you know what, that trend only reinforced the value of a long-term stable value proposition, which Raymond James has always been focused on offering advisors and their clients.
Does that become a tailwind in 3-5 years as maybe some of those folks that are leaving may decide to come back? How do you think about that?
Yeah, I'm optimistic about how that all plays out long term. And so, yeah, what is sort of disruptive now, I think, really does become opportunity, to your point, three to five years from now. And we don't know what the end game is for private equity. I'm not even sure the industry knows, frankly, right, because they're trading at multiples that are two times the multiples of the public companies, in some cases more than two times. And so they need to either have the public markets catch up or they need to have a strategic that's trading at half the multiple be willing to take them out for double the multiple. And that hasn't happened yet. And frankly, no matter which one happens, it's going to be disruptive, I think, for those advisors that are partaking.
And so that creates, again, I think, a flight to quality and stability in the industry, which I'm optimistic. I know we offer at Raymond James, and I'm optimistic will be a tailwind going forward.
So when you think about organic growth over the long term with the strong recruiting that you mentioned, the high retention, do you think that mid-single digit organic growth is kind of the right place to be? That's kind of where you've been executing. It's not actually higher than that.
Yeah, that's our long-term goal is to be in the mid-single digit growth for net new assets. And we feel like we have the headroom to do that. And as long as we continue executing and keeping our culture intact, which is our first and most important priority as a firm, then I think we will be able to do that over a long period of time.
Great. Why don't we talk about the RIA offering that you've had? You've had a lot of success with that now, $160 billion of assets, I believe. Can you talk about the value proposition that you have and the go-to-market strategy and how it differs from some of the others out there?
Yeah, I mean, there's just like in our other affiliation options, there are really good competitors and large competitors with decades of history in the RIA custody space. So we're not naive in competing in that space. We know we can't be all things to all people. We can't invest in sort of the API technology integration with as many different providers as those firms can offer. But what we're trying to do is offer a higher level of service and that culture that I described where we really treat those advisors and those RIAs as our clients and respect the relationship they have with their clients. And some of these RIAs that break away want to have a more integrated technology offering.
They don't want to à la carte purchase every single piece of their technology stack from a third party and to do the due diligence on that and the negotiation on that. So they want a more integrated technology stack like we've become accustomed to at their prior firms in a lot of cases that we can offer at Raymond James. So we're really, we're not going to compete on price. We're never the low-cost provider, particularly in the RIA custody space, but we're going to compete on service and culture. Frankly, if we can just continue gaining incremental market share in that space, it's a really big space. It's a high-growing space. It could be a nice benefit to our growth trajectory going forward.
With the RIA, that's your third channel, you're the employee, the independent contractor. Just how do you manage the complexity of having three affiliation options? What makes it difficult, would you say? How do you navigate that?
Yeah, it is difficult to do. And frankly, a lot of other firms have talked about doing it and haven't been able to because of that complexity. And I think the way we do it is by keeping advisors and clients first. And what I mean by that is trying to remain as agnostic as possible as a firm on which affiliation option an advisor chooses. When our recruiters and branch managers go out and speak to prospective advisors, what they're doing is selling those advisors on the culture and the scale and the capabilities of the firm and the platform that we have at Raymond James. And what we want is those recruiters and branch managers to be agnostic to how those advisors want to affiliate with the firm.
Because frankly, each affiliation option has a whole different set of day-to-day activities that that advisor may or may not be interested in. And so we're doubling down on that. We just promoted Jodi Perry, who ran our independent contractor channel, has a history in recruiting for that channel to run recruiting for the entire Private Client Group business in a more holistic and coordinated way to really double down on what we call advisor choice. Come to Raymond James. We're agnostic to how you affiliate with us. We just want you to be a part of the Raymond James family and enjoy the benefits that when we go talk to advisors. I just came back from Switzerland. We had a recognition trip there for top advisors and the employee affiliation options. It's music to my ears because so many of them say, "Hey, I joined seven years ago.
It was the best decision I've ever made. The only regret I have is I didn't join seven years earlier." Those advisors talk to their counterparts at other firms, and that's what drives interest in affiliating with Raymond James over time. Whichever channel and affiliation option suits your needs is where we want you to affiliate.
Is there something you have to do from a technology standpoint or internal governance or process to kind of get it right to your point earlier that others have tried, maybe have not been as successful? You guys have reached $160 billion. You're bringing in assets and advisors. Just any sort of lessons of success along the way?
Yeah, I think like most success in any business, really, it's a system and it's a collection of activities and behaviors and technology and operations and incentive programs. It's not any one thing. It's a whole system that needs to be put into place. Again, that's why it's so difficult. We've been doing this for decades and tweaking it for decades. We're still not perfect. No one is. We have a lot of history doing it, and it's embedded into our culture. It is a whole collection and a system of processes and behaviors and beliefs that we have at the firm that make that possible.
Okay. Maybe shifting gears to a topic that is top of mind for many investors, but you're probably bored and maybe annoyed with, and that is cash sorting. You've commented that we're nearing the end. Maybe I should say you're bored with as opposed to annoyed, but getting these questions over and over again. We're nearing the end of cash sorting. I think we're some of the comments you've made. Just curious what you're seeing in May and into June here. And what will it take to ultimately declare victory?
Yeah. Yeah. And just for the record, I never get annoyed by investor questions or feedback. So feel free to bring them to me at any time. We learn a lot from all of you guys. Yeah. As I said, the cash sorting, as I said, the Analyst Investor Day, the cash sorting dynamic, it does seem to be closer to the end than to the beginning. As we look this morning, cash balances are pretty close to where they were at Analyst Investor Day a few weeks ago. Some days are higher, some days are lower, but they're kind of bouncing around. So that stability gives us a little confidence that we're closer to the end of that sorting dynamic. But with that being said, we're not going to declare victory until we have several quarters of trend to point to to show that those balances truly are stable.
For the most part, to the extent that advisors have had conversations and opportunities to invest their clients' cash in higher yielding alternatives, there's been plenty of time to do that and plenty of alternatives. We offer some of the most open alternatives in the industry in terms of purchased money market funds, CDs, brokered CDs, short-term bond funds, and of course, our enhanced savings products that we offer up to $50 million of FDIC insurance to clients on. We offer a lot of different options, and we have been now for more than a year. So a lot of those discussions and opportunities have already been realized.
Great. Good to see the stability versus investor day. Encouraging. Maybe you won't get that question as much anymore. Let's talk about the technology tools that you're bringing to the marketplace here to help advisors become more efficient and to help them with growing their practices. Where are you along this journey? And where is there still room to digitize workflows for advisors?
Yeah, we've made a considerable amount of progress in technology over the last 14, 15 years since Paul Reilly became our CEO. He brought on Bella Allaire to run operations and technology for us. She brought on a really talented team of technology professionals across all the verticals. Those verticals are extensive from cybersecurity and infrastructure to every single aspect of the advisor desktop, advisor mobile, where they can do almost anything on their iPhone that they can do or their iPad that they could do from their desk. That also spans CRM, trading and rebalancing, and all sorts of things that we really focus on being one of the most integrated platforms in the industry where advisors don't have to log on to multiple systems and type in mailing addresses multiple times. We have a very competitive platform.
When we bring in prospective advisors for what we call home office visits, and they look at our technology versus the firms that they're at, in many cases, the biggest firms in the industry, they always are blown away by what we offer. That goes back to the Best of Both Worlds value proposition that I was talking about earlier. With that being said, there's always more demand than supply for technology, no matter how big your technology budget is. So we have to focus on remaining laser-focused on the technology, primarily supporting our Private Client Group business, the advisors and their clients to make sure that we optimize that technology investment.
One of the areas that you mentioned, and I also mentioned this at Analyst Investor Day, that we're really going to be focused on over the next couple of years in particular is looking at end-to-end processes and helping advisors and their branch professionals save time by automating, streamlining, re-engineering those processes to extent possible using AI and machine learning and other tools to help reduce friction, save time on administrative tasks, and give branch professionals and advisors more time to service their existing clients and bring on new clients. And so that'll be a big initiative across the firm, which will be a win-win-win. It'll be a win for the advisors and their branch professionals because it'll save them time on administrative process and paperwork.
It'll be a win for the firm and our shareholders because it should create more operating leverage and scalability in our platform to the extent that we can automate and streamline processes. That will be a big investment here over the next few years that we'll be focused on.
That's a good segue to the next topic being AI and also efficiency. So maybe just on the AI point, because it gets a lot of focus these days across the markets, across sectors. Talk about how you at Raymond James, how are you using generative AI, or is this more of the earlier machine learning AI tools? How do you kind of see that evolving? What are some of the use cases you guys have identified and sort of what learnings have you had so far from what you put in production?
Yeah, I think to some extent AI is maybe overused a little bit, not only in our industry, but across all industries. But technology and higher-level technology certainly is something that we have deployed and will continue to deploy in our business. For example, we have something called Opportunities that we rolled out several years ago, and we continue to refine and iterate on where we give advisors ideas based on their client information, the client data. They can come into their branch in the morning, open up a client profile, and they'll say, "Hey, here's some opportunities for you to expand the relationship and enhance the relationship with your clients." To the extent that you're interested in those opportunities, you can click a button, and in an automated way, it essentially pursues those opportunities for you, whether it's through automated emails or reach outs, etc.
That's an example of leveraging kind of more sophisticated technology to enhance and deepen the relationships that advisors have with their clients. Certainly, AI can play a bigger role and has been, we've started deploying it and experimenting with it. Over time, it will continue to play a bigger role, particularly in operations and service areas in our space where you can, again, streamline manual processes and get more efficiency out of those processes. It's both in the back office, middle office, and front office. Over time, that technology will enable us to be more efficient and competitive. All these things really highlight the importance and the value of having scale in our business.
If you don't have scale in our business, if you're a smaller firm in our space and you're trying to make these technology investments to be competitive, to help advisors be more productive, to comply with new regulatory requirements, it's almost impossible if you don't have scale. And so we think that'll, down the road, become M&A opportunities for us as well. So all these things we think are pointing in the right direction in terms of why we're so optimistic about our future.
Any sense on sort of quantifying how much the efficiency saves could be? Like, how meaningful could they be?
No. No, it's hard to dimension. And certainly, we haven't tried to do that publicly.
Okay. But all in, it should be helpful just in terms of the multi-year expense trajectory, it would seem, just given the opportunities set from this. So I guess just a question around the expense outlook. How should we think about the pace of expense growth as we look out over the next three-to-five years? You have inflation still. You have investments you're making for growth in the business. You're running the firm. You're growing the firm. You're changing the firm with AI. What does that all mean in terms of the expense growth?
Yeah. Our goal at Raymond James has always been to grow revenues faster than expenses over a long period of time. That generates that operating leverage and the margin expansion. And as we showed at Analyst Investor Day, we have a very long track record of doing just that. Does it necessarily happen every quarter or every year? Not necessarily. There's a lot of cycles that impact our business and those type of things. But over a long period of time, that is our goal. And that'll continue to be our goal going forward is generating that operating leverage, growing revenues faster than expenses to drive good earnings growth over time.
No specific expense growth target or just positive operating leverage on a multi-year basis, etc.
That's right. And so many of our expenses, I mean, the vast majority of our expenses are directly tied to revenues. So our biggest expense is compensation and payout to financial advisors, which is one-for-one tied to the production of those financial advisors. So I would love, I want to grow that line as fast as we possibly can because that means the production and the revenues are growing. And that goes on with sub-advisory fees on fee-based accounts, with FDIC insurance expense based on how we can grow the bank. So we have a lot, most of our expenses are supporting growth. And so we want those to grow at a healthy rate over time.
Great. Shifting over to capital allocation, which your framework is focused on organic growth as well as M&A to drive top line, as well as dividends and buybacks. I believe you have about $2 billion of excess capital today. Maybe you could talk about how you're approaching the best ways to deploy that. You've also mentioned that you don't want to sit with this excess capital for too long. But how patient are you, or how comfortable are you sitting with it for a period of time?
Yeah. So just to provide context for those in the room who may not be as familiar, our Tier 1 Leverage Ratio requirement is 5% to be well capitalized. Then that comes from the regulators. Our publicly stated target is 10%. So we want to be twice as capitalized as required by the regulators to be well capitalized. And we're proud to be one of, if not the most well capitalized firm in the industry. With that being said, we're at 12.3% as of the end of last quarter, which is much higher than the 10% requirement. And that's how you get to the $2 billion sort of of excess capital, roughly. That's the difference between the 12.3% and the 10%. And so while 10% is our target, those who know us well know that we don't manage that real time.
In our business, it's impossible to bring on the perfect acquisition at the absolute right time. We would if we could, but that's just not the way the real world works. And as far as our capital allocation framework goes and the capital prioritization framework, excuse me, it's first and foremost using the capital to invest in growth in the top line. First, with organic growth, we think that that generates the best long-term risk-adjusted return for shareholders. But to the extent that we can't use all the capital with organic growth initiatives, then looking at acquisitions. And we're very intentional about that. What I mean is we're not looking to use the capital to only grow the bottom line. And that, of course, is through buybacks. Now, that's a lever. It's the last on our list of capital priorities.
We also understand that if we can't use all the capital for generating too much capital to invest in the top line growth through organic growth or acquisitions, then we'll have to look at continuing to increase dividends, which we have a consistent history of doing. It's now our target's 20%-30% of earnings. To the extent that that doesn't use the capital that we want to use, then we'll increase the size and magnitude of our buybacks. But again, that's not something we're managing month to month or quarter to quarter. We take kind of a long-term approach to managing those capital levels down.
On M&A, maybe you can kind of give us a sense of some of the conversations that you guys are having across the industry from an M&A, strategic M&A standpoint. Where are you most focused? Where could it be most additive to the business at this point? And what are the types of properties that you're seeing out there, and what might you be the most interested in?
Well, our biggest business is the Private Client Group business. So wealth management is certainly top of the list in terms of where we would be interested in making an acquisition. But there's a few number of firms that meet our filters. And our acquisition filters that we will not waver from is it has to be a good cultural fit. If it's a good cultural fit, it has to be a good strategic fit. And only if it's a good cultural and strategic fit will we look at the financial and economics, in which case it has to be at a price where we think it could generate good risk-adjusted returns for our shareholders.
And there's a lot of the wealth management firms that are good cultural and strategic fits are private, not for sale, or to the extent that they are actionable at prices that might be higher than we can justify paying for our shareholders. But we stay close to those firms, and we hope that when those firms do become actionable, that we're short on the list of firms that they reach out to to pursue an opportunity to bring together two families to make each of us stronger going forward.
Any potential catalysts on the horizon that might be able to kind of help unlock some of those firms that may not be for sale or where those prices are less attractive?
Yeah. I don't know if there are specific catalysts as a kind of culmination of catalysts in terms of the technology investment requirement that we talked about. To have the platform, you need to be competitive with high-quality advisors. There's a pretty significant investment that's required that many of these small firms can't keep up with. The regulatory requirements that are continuing to increase in intensity, that requires a significant investment too. So I think it's those type of things which require more scale than they are able to generate on their own where they say, "You know what?
Maybe we can find a home that culturally is similar to us that respects the relationship that our advisors have with their clients, but they can bring the scale, the products, the technology, the infrastructure that we need to be competitive and to comply with regulations." So that's what we develop those long-term relationships for is for that opportunity when that time comes.
Now, outside of wealth, you're also focused on strategic M&A for your asset management and investment banking businesses. Maybe you could talk a little bit about how you're approaching that. Where might M&A be most additive at this point to those businesses?
Yeah. We look at M&A, and a lot of those M&A opportunities and the ones that we've done in the past are really just bringing on high-quality teams to almost like niche acquisitions or team liftouts or large recruiting transactions more so than large-scale acquisitions. And so we've done that with Cebile, with Financo, with Mummert in Germany when we expanded in our platform as really was our beachhead in Europe. So we're looking for those opportunities to add teams all the time to strengthen our platform all the time. So they're really nice strategic adds for our M&A business. In asset management, frankly, that's where we see most of the flow of opportunity. But it's a tough space. Most of the active managers, and most of you all know this better than me, it's a tough environment for active management.
To the extent that there is a manager showing good growth track record and growth potential, the valuation is very high. It also begs the questions in certain cases for certain categories as to whether or not that growth is sustainable. Do we want to pay high premium for a growth trajectory which may or may not be sustainable in three to four years depending on how the trend plays out? Those are the kind of things that we evaluate when looking at acquisitions.
Speaking of asset management, you recently created a private credit JV with Eldridge. Maybe you could talk about the JV, how it's going to operate, what your vision is here.
Yeah. We were looking for a partner for quite some time, and we think we found a great partner in Eldridge. This is really a capability that we want to offer our M&A clients to the extent that they want financing that we really wouldn't be able to offer on a standalone basis at a Raymond James Bank just because of the size or the profile of the loan that they're requesting. So by partnering with Eldridge, we're able to structure something that might be more attractive to those M&A clients. Now, we're going to go very slow as we proceed forward with this as we do with everything. But again, the idea behind this was to find a partner to enable us to offer financing to M&A clients that we otherwise wouldn't be able to provide at Raymond James Bank.
If it's successful five years from now, what would that look like in your view?
Too early to say. We still haven't done the first deal yet. So I think we'll know more. We like to crawl before we walk, before we run, and we're still in the crawling phase as far as that goes. But we're excited about the partner that we have. We brought in a new banker to focus on it. We think he's going to be a great addition to the Raymond James family. So we'll probably have more color on that in the coming years.
Great. We're just about up on time. Final question on regulation. We've had the final rule from the DOL, fiduciary duty. I guess what impact might that have on the industry, on your business? What changes might you have to make to adapt to that? And is there anything else on the regulatory agenda that you're closely following?
Yeah. Well, we think the latest that came out from the DOL and the fiduciary rules, certainly enhancement from the proposal. So the devil's always in the detail. And a lot of times, the challenges are in the unintended consequences. So there's still a lot more to play out there. But the other thing is we have Reg BI from the SEC. And if the overlap between this DOL fiduciary rule and Reg BI is pretty significant, then do we really need another set of rules on top of the Reg BI rules? And the Reg BI rules are relatively new. So it just seems like perhaps a regulatory layering that may or may not be necessary. So we're sorting through all that as an industry. And more to come on what the implications and consequences of those type of rules will be.
A lot of times, it's in the detail, as I said, and the unintended consequences.
We'll have to leave it there. Thank you so much, Paul. Appreciate you taking the time.
Appreciate all your time and interest in Raymond James. Thank you.